Life Insurance Securitization

Is Obama planning to kill grandma? Probably not, unless grandma is Afghani or Pakistani, and the murder weapon is an aerial drone. Or maybe you consider capitulation to private health insurance companies in health care reform an indirect way of killing grandma, given that the true death panels are the ones convened by those companies to deny coverage to, among other people, some grandmas.

But another industry that the Obama industry is busy capitulating to—Wall Street—has figured out another way to profit from grandma’s death: securitizing her life insurance. Here’s how it works, according to an article in today’s New York Times: Investment banks would give policy-holders cash for their policies, which would then be securitized and bundled as “life settlements” (with fees going to the bundlers), sold, traded, resold—just the way subprime mortgages were. And there are similar possibilities for fraud and conflict of interest as with the complex derivatives that played such a big role in the current financial crisis. The most striking aspect of this new scheme, though, is that it bets against grandma: “The earlier the policyholder dies, the bigger the return—though if people live longer than expected, investors could get poor returns or even lose money.”

Hat-tip to Mike P., who points out: “The article gets better the farther you read. It’s like a description of the mortgage bubble written before it happened. You can picture gangs of insurance salesmen ripping through elderly housing complexes, badgering old deaf people to sell their life policies. On the first page of the link, to the left of the article, is a fascinating graph showing that ‘the market for mortgage securities has shrunk to less than a fifth of its peak size’—a picture of a bubble.”

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2 thoughts on “Life Insurance Securitization”

Converting inc tax free benefits into taxable ones would seem to be what the current administration would support. insureds are not being talked out of existing life ins, they want a greater economic benefit than what is being offered them by their ins co upon surrender or lapse. They do this when they no longer want or need the policy. settlement transactions take 6 weeks to 8 months. life settlements are for insureds who are NOT terminally ill and are over age 65.This ind is reg. in many states to an extent never seen before the ins ind. When consumers buy life ins they acquire certain rights recognized by the U.S. Sup Crt like the owner right to sell their policy to a third party. Policy owners benefit from life settlements by being able to obtain the true value of the policy instead of merely receiving the surrender value or nothing upon letting the policy lapse. why should they be denied this opportunity? Instead the life ins co reaps the total econ benefit from the surrender or lapse. A policy owner should seek out the advice and counsel of their trusted advisors to help them determine what a fair value is. they should be able to exercise their contractual rights. Are insured’s capable of estimating whether or not the initial purchase of their policy was a fair deal or if they were being cheated? the insured is being sold by an AGENT of the INSURER. The agent is NOT a fiduciary of the insured as is the case in reg states where life settlement brokers are. They who act in the insured’s best interests and follow their instructions. The life ins. ind has issued policies based on lapsed based pricing assumptions, having full knowledge/belief that the policies will lapse in 5-7 yrs, fully expecting no claims will be paid. Are insured’s being cheated because of this practice? Life ins. prem may rise because of stiffer reserve requirements set by the states, not because of life settlement activity. the [life settlement] market is still minuscule and new. We should be concerned that an ind that readily admits they do not want to face the claims form the policies issue for fear they will not have enough funds. That is a risk the co faces for mispricing their policies. The consumer is the one that benefits from a life settlement. Why should they be denied the right and the value? Investors are large regulated fin instit Perhaps the regs already on the books need to enforced or enforced better. retail investors are not suitable investors for this type of investment. FINRA highlighted fees companies intend to charge that exceed “by 100 percent or more” any commission historically considered fair and reasonable.” What was not pointed out was that was based on a study conducted back in the 1940’s looking at common stock trades. The amount referred to is 5%, so 100% more would be 10%. The time, money, and effort expended in following all of the rules and regulations in place and getting the policyowner the highest and best price in the market is not comparable to on-line stock trades of today. The first year commission on new life sales is 50-100% not including renewals! Mortgage balances do not get paid when mortgage underwriters, encouraged by their company and the government lend monies to people who are of bad credit risk or have no means to pay the loans given to them. Here death benefits are not paid if life insurance companies do not honor their policies. It is their credit worthiness and their underwriters that need to be put under the spotlight to see if they have played the same types of games. There are inherent risks in the ins ind. That is why there is reinsurance, guaranty associations, and state mandated reserve requirements. Remember people do die but not all debtors pay their bills.

The life ins ind has been and will continue to find ways to mitigate the risks in their business which means they are already engaging in the practices you seem to be against.

Berkshire Hathaway I believe is an active buyers of life insurance policies as part of their overall investment strategy.